Compromise considered on tax rise Republicans suggest top bracket of 31% F

WASHINGTON -- Key Republican budget negotiators, aiming yesterday to craft a final, compromise budget package to put before lawmakers this week, seriously considered higher taxes for the top income bracket.

The possibility of such a tax compromise suggested that the end of the year's tortuous budget stalemate might at last be at hand. Sources close to yesterday's closed-door negotiations said that the outlines of a deal had already begun to emerge.

"I hope they'll be able to reach a conclusion by the end of the weekend," House Speaker Thomas S. Foley, D-Wash., told reporters. "I've generally heard that they've been doing well."

Last week, the House and Senate each adopted sharply different versions of a deficit-reduction package that would raise taxes and trim Medicare, agriculture and other benefit programs. Both would serve as the linchpin of a five-year plan to cut the federal deficit by $500 billion.

The House plan, written by the majority Democrats, would saddle the well-to-do with more of the costs of deficit reduction than the plan endorsed by a slim bipartisan majority in the Senate, which would spread the burden more evenly between the middle and upper classes.

The House bill would boost the top income tax rate from 28 percent to 33 percent, impose a 10 percent surtax on taxable incomes over $1 million and provide a capital gains tax break targeted to benefit especially the middle class. It also would raise from 21 percent to 25 percent the alternative minimum tax, designed to ensure that higher-income people pay some tax regardless of how many legitimate deductions they claim.

President Bush has said that he would veto the House bill because of its proposed rate changes, which, in total, would increase federal revenues by nearly $42 billion over five years. But yesterday, Senate Minority Leader Bob Dole, R-Kan., and Sen. Bob Packwood, R-Ore., suggested that Democrats agree to increase the top rate to 31 percent and drop the tax break on capital gains -- the profits on investments such as stocks and real estate.

Reports from the negotiations conflicted over the issue of what Democrats had proposed in return. In lieu of the income tax rate increase, some Democratic sources said they were pushing for a 20 percent surtax, proposing to drop the income threshold at which it would apply to $200,000. Their hope was to persuade Republicans ultimately to accept a 20 percent surtax at $300,000.

The millionaires' tax would raise an estimated $7.6 billion over five years, affecting perhaps 65,000 people, according to the Internal Revenue Service. A 20 percent surtax at the $200,000 level, on the other hand, would hit about 500,000 couples and individuals.

Other sources said that no such proposal had been put on the table and that the Democrats had not attempted to broaden the 10 percent millionaires' surtax to a larger group of wage-earners.

The back-and-forth over the issue, however, did suggest other areas where the two sides might be able to find a middle ground. The Senate bill, for example, proposed a 9.5-cent increase in the federal gasoline and diesel fuel tax, bringing nearly $43 billion into federal coffers over five years, while the House bill rejected any such increase.

Sources close to the talks said that House negotiators had accepted a gas tax increase in theory and that the only question was the amount by which the levy would be raised.

Similarly, the Senate would limit the itemized deductions of people with incomes over $100,000 a year, permitting individuals in that category to write off only 95 percent of their deductions against any part of income that exceeds $100,000. The limit would not affect deductions for medical expenses, investment interest or casualty losses.

The House bill does not include such a provision, and Democratic leaders are reluctant to include it in the final, compromise bill because they fear alienating voters in high-tax states such as New York that, traditionally, have been Democratic strongholds.

The Senate's proposal, however, would raise $29.5 billion over five years, and, once again, Democratic leaders in the House appear to have accepted the idea that some kind of limitation will have to be included in the final bill. The only question, sources say, is at what level the ultimate limit will be set.

Tax negotiators met yesterday with White House Budget Director Richard G. Darman and Chief of Staff John H. Sununu. A source close to the negotiations said that they were "proceeding smoothly towards what looks like a conclusion."

But, the source continued, "It will be easier to wrap these negotiations up than it will be to sell the final product to the floor."

Indeed, rank-and-file members of Congress will be asked to approve the deal by midnight Wednesday, at which point the government is scheduled to run out of money again. That will be just two weeks before Election Day.

The House already has rejected one compromise negotiated between the White House and congressional leaders, largely because of provisions that would have increased gasoline taxes and raised the out-of-pocket costs of the Medicare program.

It appears virtually certain that some variant of those same two provisions will be included in the new compromise.